Sales tax increase: A trial balloon that needs to be popped

Hours before the 2012 General Assembly session started, Gov. Martin O'Malley dusted off the frustrating passivity he employed to such ill effect in 2011. Speaking to Marc Steiner in the radio host's annual pre-session show, Mr. O'Malley casually mentioned that if he had his "druthers," Maryland would avoid a lot of the cuts that will be necessitated by its current budget woes and would instead raise the sales tax by another penny.

Not that he's actually proposing such a thing, he and aides hastily clarified later. He was just mentioning it as an option, in case anyone finds that more palatable than the actual budget he will introduce later this month. It was in one sentence a reminder of two low points in his leadership last year: his insistence that he wouldn't propose any tax increases but wouldn't mind if the legislature did, and his surprise announcement during his State of the State address that he would seek strict limits on septic systems — an idea, like his latest on the sales tax, that caught nearly everyone else in Annapolis totally off guard.

This is not an attractive or effective mode of leadership. If Mr. O'Malley believes the cuts he will be proposing in the budget are more damaging to Maryland's future than an increase in the sales tax, he should say so, propose the tax and make the case for it. He is, after all, the one in charge here. And if he wants the General Assembly to seriously consider a major new revenue source, he needs to go about the careful work of building support for it and not just leave the fate of such a major decision up to the vicissitudes of a legislative session. He knows how to do this; he did it in 2007. The fact that he's acting more like a disinterested observer than the state's chief executive only fuels critics who say he has checked out of this job and is focused on his ambitions elsewhere.

And then there's this: Raising the sales tax is a bad idea.

It is a regressive tax, and in Maryland, it is made more so because it applies solely to goods and not services. As Senate President Thomas V. Mike Miller said Wednesday (en route to giving a direct no way, no how response to the governor's idea), if the state wants to raise additional revenue from the sales tax, the smart way to do it would be to broaden the base. That would mean that much of the new revenue would come from professional services — the sorts of things the poor are less likely to avail themselves of.

Back in 2007, Mr. O'Malley was keenly aware of the regressive nature of the sales tax and went to great lengths to offset it. In rolling out a package of tax increases and cuts, plus a plan for new revenue from slot machines, the first-term governor stopped by a family's house in Ellicott City to announce that, despite his reservations, he would ask the legislature to increase Maryland's sales tax from 5 percent to 6 percent. He said then that it was necessary to balance the budget, but when packaged with his other reforms — increasing the progressivity of the income tax and cutting the property tax — "the vast majority of Marylanders will be paying less."

The governor expressed no such reservations this time. "I think we should remember that no one in our state lost their house, lost their job or lost a business because of an additional penny on the sales tax," Mr. O'Malley said later on Wednesday, according to The Washington Post.

Whether that's true or not is impossible to say (as the Chamber of Commerce has noted in the past, about 40 percent of sales taxes are paid by businesses, so the job loss claim in particular may be suspect). But it is somewhat beside the point. The sales tax idea comes at the same time that the legislature is expected to consider an increase in the gas tax and an increase in the so-called "flush tax" — both measures that may be necessary for the long-term well-being of the state but which also fall equally on the wealthy and the poor.

This is not the "balanced approach" Governor O'Malley promised when he talked of the potential need for new revenues at the Maryland Association of Counties meeting last summer. It is a simplistic one that substitutes a tax that disproportionately affects the poor for budget cuts that would do the same thing. The Maryland Budget and Tax Policy Institute, a left-leaning think tank that has been pushing for months for the governor to incorporate tax increases in his budget-balancing plan, was tepid about a sales tax increase for that very reason. Such an increase, it noted, "would affect low- and moderate-income working families disproportionately" and would need to be paired with an increase in the earned income tax credit or other measures to help offset its regressive effects. But the group would prefer other revenue options, such as a resumption of the millionaires tax and reform to the corporate tax to make sure multi-state companies actually pay their fair share.

But such considerations seem to have disappeared from the governor's thinking. Instead of seeking the fairest alternative to the cuts that would be needed to erase Maryland's $1 billion budget gap, he says he would prefer the laziest one — a single change to tax law that would erase about $600 million of the problem. Instead of leading purposefully and directly, he evidently prefers to govern by offhand remark. In fairness, Mr. O'Malley has an advantage over the rest of us in that he knows exactly what it will take to balance next year's state budget without a major new infusion of revenue, and he can better judge relative harms. But if he wants to push the state on a different path, this is the wrong way to do it.